EU regulators analyze DeFi’s benefits and “significant risks” in report

Odaily Planet Daily News The European Securities and Markets Authority (ESMA), the EU market regulator, published an article on October 11 about decentralized finance (DeFi) and its risks to the EU market. In the article, ESMA recognized the advantages of DeFi, such as greater financial inclusion, development of innovative financial products, and increased speed, security and reduced costs of financial transactions. However, the article also highlighted the “significant risks” of DeFi. According to ESMA, the first “significant risk” is liquidity risk related to the high speculative nature and volatility of many crypto assets. The regulator compared Bitcoin or Ethereum 30-day volatility to the Euro Stoxx 50 index, with the former being on average 3.6 times and 4.7 times higher than the latter. ESMA does not believe that DeFi can successfully avoid counterparty risk, and smart contracts are not immune to errors or vulnerabilities. According to the report, DeFi is particularly vulnerable to fraud and illegal activities because of its lack of KYC. In addition, another important source of risk for DeFi users is the lack of identifiable responsible parties and the lack of recourse mechanisms. The report concluded that, for now, DeFi and cryptocurrencies in general do not represent a “significant risk” to financial stability. This is due to their relatively small size and limited interconnectivity between cryptocurrencies and traditional financial markets. (Cointelegraph)